More than 3,000 sellers join Amazon every day, with millions already selling on the platform. This competitive environment demands sellers to run their operations diligently so they can increase their net income even if the margins are low.
This diligence includes accounting for every dollar spent on running their business operations on Amazon. For instance, when you run a PPC campaign to make your way among tons of competitors, you must be very mindful of the cost and returns.
Amazon has established some PPC performance metrics for determining how your cost of bringing in clicks translates into sales. One of those metrics is ACOS.
In this post, we will thoroughly cover ACOS: what it means, how to calculate it, its good and bad values, and how you can control it.
Without any further delay, let’s start our discussion.
ACOS stands for Advertising Cost of Sales, which is quite self-explanatory. It is the expense you incur while running PPC ads to generate sales.
Mathematically, ACOS is the ratio of advertising expenditure to ad-attributed sales. It calculates the part of sales revenue that has been spent on ads to generate that particular revenue. ACOS on Amazon is calculated as a percentage.
The above definition suggests that sellers must keep their ACOS as low as possible. The lower ACOS means you’ve spent less generating the given sales volume.
The calculation of ACOS is quite simple if you know the relevant numbers. First, divide the cost of your PPC promotions by the amount of ad-attributed sales and then multiply it by 100.
It goes something like this.
Advertising Cost of Sales (ACOS) = (Ad Spend / Ad Revenue) x 100
With this simple ACOS formula at your disposal, you don’t need any dedicated ACOS calculator. Put your ad expense and ad-attributed revenue in the above formula, divide them and then multiply the result by 100 to get your ACOS in percentage. ACOS calculator also seems redundant because Amazon calculates this value for every PPC ad campaign and displays it on the Seller Central (more on that later).
By now, we know how to calculate ACOS. However, it is still not clear what ACOS represents in the Amazon and PPC framework. So, let’s try to understand that with the help of an example.
Suppose you’ve spent $100 on a PPC campaign to promote your listing. It results in generating $500 ad-attributed sales.
So, you have an ad expense of $100 and ad revenue of $500. Calculate ACOS with the help of these numbers.
ACOS = (100/500) x 100
ACOS = 20%
ACOS 20% would mean you spend 20 cents on ads to generate $1 of sales. Lower ACOS means you have to spend fewer cents on every dollar of ad-attributed sales. On the other hand, higher ACOS means a large portion of every dollar of revenue goes into ad expense.
The above example makes it clear why every Amazon seller should strive to keep ACOS low. However, the “low” here is relative. With varying business sizes and a zillion product categories, there is no way to state a single good ACOS value for every Amazon seller.
For instance, a seller with high sales volume and good margins may not mind a slightly higher ACOS. But, on the other hand, someone with low sales volume and a lower margin will surely want to keep their ACOS lower.
Generally, every Amazon seller should aim to keep their ACOS within 30%. It means they should not spend more than 30 cents on every dollar made in ad-attributed sales.
Break-even ACOS represents the point where your advertising expenditure equals your profit. In other words, you don’t make any profit or incur any loss at break-even ACOS.
Suppose you sell a portable charger at $30. If your COGS is $10 and Amazon fees are $8, your profit margin on a product will be $12.
Suppose you have to spend $12 (all the profit) on PPC to generate a single sale. The ACOS would be:
ACOS = (Ad spend/Ad Revenue) x 100
ACOS = (12/30) x 100
ACOS = 40%
This will be the breakeven ACOS for the given scenario. So, if you want to keep your sales operations profitable, your target ACOS must be below 40%.
It has been established that Amazon sellers need to minimize their ACOS as much as possible. When a seller manages to reduce their ACOS, it means one thing: They're making more sales while spending the same amount on ads.
If you proactively want to reduce your ACOS for better net profit, focus on these things.
Amazon lets you do either automatic or manual keyword targeting with PPC campaigns. In automatic targeting, you set a budget, and Amazon automatically picks keywords for your listing while considering the relevant product category.
Automatic targeting is good for shortlisting keywords or increasing your listing visibility. However, it is not the best of approaches when it comes to returns. As a result, you may end up spending a heavy budget without getting enough conversions.
Therefore, avoid using automatic keyword targeting as your default PPC course of action.
PPC campaigns are based on keywords. Therefore, your keyword selection often decides the fate of your PPC campaign. For general-use products, dozens, if not hundreds, of keywords can tie to your listing. However, you can’t make all those keywords part of your PPC campaign, especially when you want to reduce your ACOS and improve your ad return.
So, the best way to pick keywords to keep your ACOS low is to choose keywords with relatively lower PPC bids and a higher conversion rate. Before starting any campaign, you can find the PPC bid estimates of relevant keywords on the Seller Central and through this tool.
It is better to run a trial PPC campaign for all the selected keywords for a week or two to find their conversion rate. Once the trial campaign is over, download its analytical report from your Seller Central account. Then, identify the keywords boasting the highest CVR (conversion rate) among all of them.
You can then use those keywords for your actual PPC campaigns with an increased budget.
PPC marketing essentially derives clicks to a listing. It doesn’t guarantee conversions and sales. However, the entire point of running a PPC campaign for any seller is not to bring just clicks. They also need maximum conversions from their PPC efforts.
Even a successful PPC campaign with a high click-thru rate will fall flat if the listing content fails to convince visitors. Therefore, you need to optimize your listing content for the audience while taking care of all the PPC and SEO aspects.
An audience-optimized Amazon listing comprises high-definition product images, video (if applicable), and easy-to-skim bullet points and descriptions. Also, make sure you don’t just outline product features and specs in the text of the listing. Customers are more interested in knowing how those features and specs address their pain points and needs. So, exactly tell them that.
If you’re a brand owner on Amazon, don’t forget to use A+ Content. The enhanced images and text silos of A+ Content add characters to a listing that subsequently increases the chances of conversion.
When you configure an ad campaign on your Seller Central, you have two options while adjusting the bid i.e. keep it fixed or dynamic. When you specify a bid, you essentially fix what you want to spend as your CPC (cost per click), and it doesn’t change throughout the campaign.
Meanwhile, a dynamic bid is a flexible proposition that changes with Amazon's assessment of the chances of conversion for your listing for the given set of keywords.
In dynamic bidding too, you can choose between two options: up and down and down-only. When you opt for the first type of dynamic bidding, your bid can go up and down if the chances of conversions are high or low, respectively.
When you choose down-only bidding, you essentially direct Amazon to lower your bid if the chances of conversion are low for the given keyword.
So, down-only bidding can save your PPC budget from clicks that lead nowhere. In other words, the appropriate use of down-only bidding can cut down your advertising cost of sales.
When selecting the keyword matching for your PPC campaigns, you have three options: broad, phrase, and exact matching. Broad match bidding makes your listing ad appear for search queries that have your targeted key phrase in any order, along with other words.
Phrase match bidding responds to search queries if they match your targeted keywords in the same order. Finally, there’s exact match bidding that only triggers when a search query matches your targeted keyword word by word. So, among all the types of matching bids, the exact match represents the very thing buyers are looking for.
If you choose a long-tail keyword “10,000 mAh portable charger for camping” for exact match bidding, your ad will only appear when a user enters this exact search query. This search query represents a strong buying intent. Therefore, your ad for this query will likely get more clicks and conversions.
Good keyword research can bring you a good list of exact match queries that might offer you a 100% click-thru rate with excellent conversions. A higher conversion rate will always bring your ACOS down.
Besides listing optimization and sound PPC practices, you can also cut down your ACOS by increasing the Average Order Value (AOV) of your listing. AOV represents the total price of your listing. So, if you raise the AOV of your listing that you promote through PPC ads, you can increase the number of dollars you can make in sales against the same amount of advertising spend.
There are multiple ways to improve your AOV.
Using all these measures together can help you reduce your ACOS and improve your net profit.
You can find your ad campaigns’ ACOS (already calculated and updated) on your Seller Central account.
Low ACOS is undoubtedly a desirable outcome for every seller. Nonetheless, you don't have to fixate on your ACOS figures all the time. Here are two scenarios where higher ACOS doesn't matter much.
Many sellers like to maintain a position for specific keywords with their listings. This exercise aims to improve brand visibility and recognition for keywords and phrases central to the brand and product. So, you may not get a low ACOS for your PPC campaign in such a scenario. However, the branding carried out through this paid promotion will help you with sales in the long run.
When you start a PPC campaign from scratch, you may need a week or two to make sense of things. For instance, you get the list of most valuable keywords after running a trial campaign for a few days (as discussed earlier). Therefore, you don’t need to worry if your ACOS remains higher in the first 10-20 days.
ACOS will eventually come down if you adopt the measures discussed in the previous section.
Also, don’t take the most recent ACOS data (e.g. for the last two days) at face value. Those figures can often be inaccurate due to delayed sales data updates.
While discussing ACOS, we can’t ignore ROAS since both are strongly related. For starters, both are the performance metrics for PPC ad campaigns. Then if we look at them mathematically, ROAS is the inverse of ACOS and vice versa.
Therefore, you can establish a relation between them through this simple equation.
ACOS = 1/ROAS
In general, ACOS represents the costliness of the advertising campaign. It shows you how much you have to spend to make a certain amount in sales. On the other hand, ROAS shows the profitability of the PPC campaign. It tells how much gain you have made from the money you have spent on advertising.
Generally, these parameters tell the same story but from different POVs. The following points can further elaborate on how ACOS and ROAS are similar yet different.
There are many recurring questions regarding ACOS and its connection with other advertising KPIs. So let's answer those questions here.
No, they are not the same. ROAS is the inverse of ACOS. Nonetheless, both are the Amazon advertising KPIs and depict your ad performance from different angles. ACOS highlights costliness while ROAS shows profitability.
You can reduce ACOS by improving conversions and smartly making your PPC moves (choosing the most suitable keywords, exact matching, down-only bidding, etc).
Yes, ACOS and ROAS are inverses of each other.
Good Amazon ACOS is a relative value. For some products, ACOS of 25% might be great. Meanwhile, even 20% ACOS is not considered good for some items. The rule of thumb is to keep your ACOS below its break-even value— the higher the difference between break-even ACOS and actual ACOS, the better the outcome.
TACOS stands for Total Advertising Cost of Sales. It offers a broader view than ACOS because it considers total revenue (ad-attribution + organic sales). The formula of TACOS is as follows:
TACOS = (Ad expenditure /Total Sales) x 100
By calculating TACOS, you can determine your overall profitability. Moreover, TACOS can tell you how much you depend on paid ads to generate sales.
We hope the above discussion helps you wrap your head around this critical Amazon advertising KPI. The right PPC moves combined with good listing optimization can help you reduce your ACOS and increase your profitability.
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